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Chapter 2

MGTA01H3 Chapter Notes - Chapter 2: Gross Domestic Product, Purchasing Power Parity, Genuine Progress Indicator

Management (MGT)
Course Code
Chris Bovaird

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Chapter Two: Understanding the Environments in Business
The Economic Environment
-All businesses, no matter size, operate within a larger external environment
-External Environment: everything outside an organizations boundaries that might
affect it
oPlays a major role in determining success
-Managers must have accurate understanding of environment
-No single firm can control the environment
oHowever managers should not simply react to change
Should be proactive
-Economic Environment: conditions of the economic system in which an organization
oEx: McDonalds is functioning within an environment that has moderate growth,
moderate unemployment and low inflation
Means most people can afford to eat out but must pay higher wages
Low inflation means it pays constant price for supllies
-Three keys goals of Canadian economy Economic growth, economic stability and full
Economic Growth
The Business Cycle

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-A fundamental question how do we know whether economic system is growing?
-Business Cycle: pattern of short-term ups and downs (expansions and contractions) in an
oIt has four phases peak, recession, trough + recovery
-Recession: a period during with aggregate output declines, as measured by real GDP
-Depression: particular severe and long-lasting recession
-Periods of expansion + contraction vary several months to years
Aggregate Output and the Standard of Living
-Main measure of growth in business cycle aggregate output
-Aggregate output: total quantity of goods and services produced by an economic system
during a given period
oAn increase in aggregate output is economic growth
-When output grows more quickly, TWO THINGS HAPPEN
oQuantity of goods and services per person goes up
oSystem provides more of the goods and services people WANT
-When these two things occur higher standard of living
-Standard of living: total quantity and quality of goods and services that a countrys
citizens can purchase with the currency used in their economic system
Gross Domestic Product
-Gross domestic product (GDP): total value of all goods and services produced within a
given period by a national economy through domestic factors of production

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-Is GDP is going up nation is experiencing growth
-Gross national product (GNP): total value of all goods and services produced by a
national economy within a given period regardless of where the factors of production are
oOutputs not produced domestically
oThe profits earned by a company ABROAD are included in GNP not GDP
-Profits earned by foreign firms in Canada included in GDP
-An organization called Redefining Progress proposed a more realistic measure to asses
economic activity
oGPI Genuine Progress Indicator
Treats activity that harm the environment/quality of life as costs + gives
them negative values
-GPI has shown us GDP has been increasing for many years
Real Growth Rates
-GDP + GNP differ slightly
-GDP is preferred method of calculating national income and output
-REAL GROWTH RATE OF GDP the growth rate of GDP is adjusted for inflation and
changes in the value of the country’s currency
oThis is what counts
-Growth rate depends on output increasing at a FASTER rate than population
oThen our standard of life should be improving
GDP per Capita
-GDP per person – better measure than GDP
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